Central banks turning gold buyers

September 29th, 2010

For the CBGA (Central Bank Gold Agreement) year to end September 30, central bank gold sales are estimated to be 6.2 tones, down 96% from their high of 497 tons for the CBGA year ended September 30, 2005, the year for the highest sales under the CBGA. Over the last ten years, central banks sold 442 tons a year on average. With this about-face, it is like a couple of gold mines shutting down. But, the news gets still better for gold investors.

According to the Financial Times, the gold market analysts at GFMS estimates that central banks as a group will be buyers of gold this year for the first time since 1988. On a net basis, the Times reports, are forecast to be small, at around 15 tons. Large official purchases of gold – in the hundreds of tons – have not been seen since 1965, prior to the collapse of the Bretton Woods system of fixed exchange rates linked to the gold price. (In doing this analysis, obviously the Times ignored (missed?) the 200 ton purchase by the Reserve Bank of India from the IMF.)

For two decades, central banks roiled the gold market with sales and announcements of sales. Could gold ever rise again, supposedly sage analysts asked, with central banks holding half the world’s supply of gold? It was an accepted Establishment position that selling gold and moving the funds to sovereign debts was a smart move.

The most ignominious seller was the UK Treasury, which announced in May 1999 that it would be selling half of Britain’s gold reserves. Prices plummeted on the announcement, yet the UK Treasury sold. Today, Gordon Brown, then Chancellor of the Exchequer, still has egg on his face for that move. The UK averaged less than $300/oz for its gold. The UK sales were undoubtedly responsible for gold hitting a 23-year low at just above $250 an ounce.

Other central bankers saw the brilliance (sic) of Brown’s move and joined in the selling. Spain halved its gold holdings, and France started a program of large disposals. The Financial Times calls it a gold rush – but in reverse. For nearly 20 years the world’s central banks, including the central banks of Canada, Switzerland, Belgium and Australia, sold their once prized gold bars

From 1990 until last year, central banks around the world sold about 7,500 tons of gold. Over the last decade, the 442 tons central banks dumped each year, on average, add up to more than the annual output of China, the world’s biggest gold producer. The 442 tons equals about 10 per cent of annual demand.

Now, though, things have changed as central bankers and investors alike have come to recognize the dangers of owning assets that can be created at will. Consequently, central gold sales that were relied on for years are, essentially, no more.

Additionally, big mining companies, AngloGold Ashanti being the latest, have moved to eliminate their hedge books. This, along with central banks becoming net buyers, means less gold on the market at a time when investor demand for gold is increasing daily.

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